Reviewing Microsoft’s Performance in 2016

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Microsoft’s (NASDAQ:MSFT) stock price has increased by over 13% year to date, while return for NASDAQ composite index was close to 9%. During the year, Microsoft continued to implement its “mobile first, cloud first” strategy. However, as cloud first strategy was implemented, Microsoft’s revenues declined by 4.12%.  Nevertheless, the launch of Surface Laptop and the new version of Surface Pro did help the company to boost its personal computing revenues during the year. In this note, we explore Microsoft’s revenues.

See our complete analysis of Microsoft here

Office Revenues Improves As Office 365 Gains Traction

Microsoft’s Office division makes up 37.6% of Microsoft’s estimated stock price. Over the course of last nine months, the productivity and business process revenues for the company have grown by 3.72%, primarily due to 1% growth in commercial Office products and cloud services and nearly 45% growth in Office 365 commercial seats to 85 million. Furthermore, Office 365 consumer subscriber base grew by 16.5% to 24 million in the last nine months and consumer Office revenues grew by 10% (approximately).

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As Microsoft’s perpetual license model for Office transitions to a subscription-based structure, revenues will be negatively impacted over the short term, in our expectation. However, Microsoft will be able to monetize Office 365 over this extended period of usage, as users tend to use a software over a longer period of time. We currently project revenue to increase from $21 billion in 2015 to $22.62 billion by the end of our forecast period.  ((Read about how Office 365 can boost Microsoft’s revenues here))

Dynamics Software Revenues Improving

The Microsoft Dynamics family includes six products. While Microsoft Dynamics AX, GP, NAV and SL are enterprise resource planning (ERP) solutions, Microsoft Dynamics CRM is Microsoft’s customer relationship management offering and includes Microsoft Dynamics RMS (retail management system). The Dynamics GP, NAV and SL products are for small and medium enterprises, while AX is best suited for larger enterprises.

Microsoft’s Dynamics Cloud services continue to report an increased adoption, as Microsoft’s clients continue to adopt the CRM and ERP services that deploy machine learning and intelligent cloud to glean insights from previously siloed data to transform how people work across finance, sales, marketing and customer service. While Microsoft chooses not to disclose its Dynamics revenue allocation between CRM and ERP, we estimate that Dynamics software revenue grew by 25% in 2016 from $3.76 billion in 2015 to $4.70 billion.

Server Products Continue To Perform Well

Microsoft’s Windows Server division is one of the fastest growing divisions of Microsoft and contributes over 36.8% to Trefis’s estimated stock price. During the last nine months, the Intelligent Cloud segment (Azure, Server products and enterprise services) delivered $19.19 billion in revenues, generating year-over-year growth of over 6%. While Server products and Cloud services revenue grew in mid single digits, driven by growth in Microsoft SQL Server, adoption of the cloud-based Azure platform resulted in triple digit growth in its revenues. As a result of these products, the company’s Cloud revenue run rate exceeded $13 billion.

The company is significantly ramping its Azure platform to boost its Cloud revenues through IaaS and PaaS solutions. [1] Furthermore, its SQL servers continue to lead the server software industry as the technology moves to the Cloud and Big Data analytics gains takes center stage. Based on these trends , we expect this division to become an important driver for Microsoft’s value in the coming quarters.

Hardware Launches Bolsters Personal Computing Division

 Microsoft acquired Nokia’s Hardware phone division in 2014. Since the acquisition, it has ramped down the production of handsets as the division was not able to make headway in the smart phone market. As a result, revenues from phone division have declined by over 90% in the last nine months. However, Microsoft’s personal computing division has done exceptionally well in the last nine months, largely due to launch of its Surface devices. The revenues have declined marginally by 0.90% to $27.64 billion.

In order to ensure that the company continues to strengthen its position in the hardware computing industry, it launched a host of devices and solution in 2016. [2] It is rumored that the company also plans to launch Surface Phone to cater to premium Smartphone industry so that it can strengthen its eco-system of surface devices. [3]

Trefis expects that new launches will continue to do well, especially the Windows Surface Book, in the coming quarters and this would help the company to report a growth in revenues in 2017 and beyond.

We currently have a $58.59 price estimate for Microsoft, which is 8.4% below the current market price.

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Notes:
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  2. Read about these launches here []
  3. Read about it here []